Purchase Makes Newport REIT Largest of Kind

Health Care Property Investors Inc. in Newport Beach has agreed to buy American Health Properties Inc. for about $700 million in stock, creating the largest real estate investment trust focused solely on health care properties.

The purchase boosts Health Care’s holdings by 68 properties to 423. The combined company will have a total market capitalization of $2.9 billion and own nursing homes, assisted-living centers, hospitals and medical office buildings across the U.S.

American Health will boost the amount of revenue Health Care gets from medical office buildings while reducing its exposure to nursing homes. Operators of these facilities are under financial pressure amid changes in the way they are reimbursed by Medicare, which has led to lower revenue and forced some to request rent concessions from landlords.

“On the surface, this is a positive transaction for Health Care,” said James Sullivan, a real estate analyst at Prudential Securities Inc.

Each American Health common share will be exchanged for 0.78 of a share of Health Care. Health Care also will issue $100 million in preferred stock and take on $300 million in debt. The transaction values Denver-based American Health at about $19.65 a share.

American Health shares, down 8.8% this year, rose $1 to $19. Health Care’s stock fell 69 cents to $25.19 a share. It is down 18% so far in 1999.

Moody’s Investors Service cut Health Care’s debt rating one notch to “Baa2” from “Baa1,” on concern that the company may be taking on too much debt in the transaction.

Health Care is paying a price equal to 7.76 times American Health’s estimated 1999 earnings, in line with the shares of other health care REITs, according to PaineWebber Inc. Looking at the transaction another way, though, Health Care is buying its competitor at a 25% discount to the estimated value of its underlying properties, according to analysts.

The transaction “will add a number of the best hospital assets currently owned in the sector and a strong group of medical office and physician clinic buildings to what is already a well-diversified portfolio,” said Kenneth Roath, Health Care’s chairman and chief executive. He expects “significant” savings from combining the companies.

That would lead to an initial increase in earnings of 6 cents a share on an annual basis, Roath told analysts and investors on a conference call. “Over time, we believe, we can do a lot better than that,” he added.

Health care REITs have also been hit hard by the changes to Medicare reimbursement, on fears that some of their tenants will go bankrupt and default on rent payments.

With their share prices depressed, health care REITs have been unable to sell stock to finance growth, their main driver of earnings.

As a result, profits for the group are expected to increase 5.4% this year, compared with a gain of 9.4% for all REITs, according to Paine-Webber. American Health’s earnings are only expected to increase about 1% this year.

REIT managers say they can better raise capital and keep tenants by merging and getting bigger.

“The scale and breadth of the combined companies will better serve our investors and customers,” said American Health Chairman and Chief Executive Joseph Sullivan.

REITs are companies that own all types of properties, from Manhattan office buildings to California apartments to Texas prisons. They are exempt from corporate income taxes if, among other things, they distribute at least 95% of net income to shareholders as a dividend.